The Fed: The FOMC Game

The Federal Open Market Committee (FOMC) met yesterday and opted not to start tapering off the $85 billion/month in purchases of U.S. Treasuries and mortgage-backed securities it’s been making for the last year or so.

That was unexpected. The equity markets reacted ecstatically and rose to new all-time highs. Traders had thought The Fed would start slowly tapering the purchases and end them by mid-2014.

Markets had been dreading the possibility for months, but were jubilant when it didn’t happen.

The FMOC doesn’t have a regular set schedule. It meets periodically 8-10 times a year.

Each meeting lasts two days where, at end, it releases a public statement describing any monetary policy changes it decides to make. The Fed Chairman then reads the FOMC statement verbatim at a press conference where, afterward, he/she answers reporter questions for about 45 minutes.

The FOMC Game

During these times of great economic uncertainty the entire financial world hangs on every single word in the FMOC statement. There is endless speculation on what each word means.

In their meetings the FMOC apparently takes the statement from their previous meeting and modifies it for re-release.

The best way to figure out what the FMOC is thinking is to play the FMOC game – cross compare the newest statement, word for word, with the previous one to see the differences.

Fortunately, the Wall Street Journal provides an automated tool that compares and highlights the differences between any two FMOC statements: “Fed Statement Tracker“

The default action is to compare the two most recent FOMC statements.

The words or characters deleted are strikethrough and highlighted in pink. New words or characters added are highlighted in green.

FOMC Statement – 9/18/2013

Boiled down into a few words, the cross compare shows that the FMOC believes its asset purchases are continuing to support recovery and that the economy is slightly better off now than the last time they met in July.

The most important new line said, “However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases.”

The FOMC went on to add, “Asset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s economic outlook as well as its assessment of the likely efficacy and costs of such purchases.”

That is what rallied the equity markets to new highs.

Conclusions

The Fed is responsible for monetary policy. The Congress controls fiscal policy. Combined they have influence, but not control, over the greater economy of the United States.

One gains great insight and understanding on Fed actions by playing the FOMC game using the Wall Street Journal‘s Fed Statement Tracker. Try it, you’ll like it.